Volatility on major and emerging- market currency options rose to a more than one-year high as traders hedged against the risk of further flight from risky assets amid the U.S. subprime mortgage crisis. Rising global overnight lending rates led central banks in the U.S., Europe, and Asia to add extra cash to the banking system. Traders exited so-called carry trades, the strategy of borrowing funds in low-interest rate currencies to invest in higher-rate ones, and sought the safety of government securities.
“People are buying options to take out insurance against further declines in the high-yielding currencies,” said Neil Jones, head of European hedge fund sales at Mizuho Financial Group Inc. in London. “There is a perception that there is more trouble ahead. People want to put on option hedges to ride out the credit market storm.”
Volatility on major currencies options reached 8.30 percent today, the highest since August 2006, according to a JPMorgan Chase & Co. index gauging three-month implied volatility. The index closed last week at 7.48 percent and touched 5.73 percent on June 5, the lowest since the bank began tracking the data in June 1992.
Implied volatility, a component of setting option prices, indicates traders’ expectations of currency swings.
Emerging Currencies
A JPMorgan index that tracks three-month implied volatility on emerging currencies rose to 7.55 percent today, the highest since March. The bank’s emerging index includes options on the Brazilian real, Mexican peso, South Korean won, Singapore and Taiwan dollars, the Polish zloty and South African rand versus the dollar.
The yen fell 0.1 percent today to 118.24 per dollar at 1:42 p.m. in New York, after gaining 1.31 percent yesterday. The Australian dollar fell 1.1 percent versus yen and 1.2 percent versus the U.S. dollar so far this week as investors exit carry trades to trim risks.
Yields on two-year notes declined 1 basis point, or 0.01 percentage point, to 4.44 percent. Earlier they touched 4.34 percent, the lowest since January 2006.
Global stocks declined as with the Dow Jones Industrial Average down 0.6 percent at 1:43 p.m. New York time and London’s FTSE 100 stock index closing 3.71 percent lower. Morgan Stanley Capital International Asia-Pacific Index of regional shares fell 3 percent to 149.13.
Highest Since 2006
Volatility on one-month options on the Australian-U.S. dollar exchange rate reached 11.25 percent, the highest since May 2006, as investors bought protection against a slide in the Australian currency. The Australian dollar weakened 2 percent against the U.S. currency in the last two days.
The demand for puts relative to calls on the Australian- U.S. dollar rate rose to the highest since May 2004. The so- called risk-reversal rate touched minus 1.5 today. A negative reading means greater demand for puts, granting the right to sell, than calls, which give the right to buy the Australian currency.
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